Business Law Articles
By Rob McKellar
Marriott Harrison LLP
London, United Kingdom
Whether you are an entrepreneur in charge of your first start-up, or an established company looking to open a new office, the decision to rent office space can be fraught with pitfalls and costs:
Break Clause/Alienation – Solicitors are trained to hope for the best and plan for the worst. If your new venture doesn’t take off, a quarterly rent payment with no ability to get out will feel like salt in the wounds. Most leases will allow for the tenant to ‘assign’ their obligations to another company, but this can often come with conditions from the landlord, including guaranteeing the obligations of the incoming tenant or ‘assignee’. Ask about inserting a ‘break clause’ into the Heads of Terms – this provision, if served correctly, will allow you to get out of the lease at a pre-agreed date with no further rent payments.
Service Charge – If you are taking rental space in a larger building (a floor in an office block, a unit in a shopping centre) then the landlord will be responsible for repairing and maintaining the ‘common parts’ of that building. However, the expenditure for this and the services they provide (lifts, reception area, insurance etc.) will be charged back to the tenants as part of the Service Charge, whether by reference to floor area, an agreed percentage or the landlord’s ‘fair and reasonable’ discretion. If your building looks like it may need imminent repair, consider getting a survey done to understand how much such repairs will cost you as the tenant. Some landlords may also consider a Service Charge ‘cap’ or limit as part of the negotiating process.
Repair/Yield Up – It is important to remember that, on lease expiry, the landlord will expect the property to be returned to it in good repair and condition, to allow the landlord to swiftly re-let the property to a new tenant. If you are taking a new lease, it may be worth negotiating for a limit to this repairing liability by having a surveyor create a ‘schedule of condition’, being a photographic schedule of the current condition of the property annexed to the lease. This will be invaluable at the expiry of the lease to ensure you are only returning the property to the landlord in the same state of repair, rather than improving the property for their benefit.
Security – Many landlords will look at the ‘covenant strength’ of a potential tenant, being how likely they are to keep paying the rent and not default. If you are a start-up, or even a subsidiary of a larger company, the landlord may require extra security to enter into the lease. This can come in the form of a ‘rent deposit’, being money paid up front into a separate bank account, to be withdrawn from if you fail to pay rent. A sum like this can cripple cash flow for a new business, so consider a mechanism to get the monies back after, say, 3 years rent payment (e.g. the provision of accounts showing profits at the level of 3x the rent) or bringing in a ‘guarantor’ such as a parent company to guarantee the tenant’s obligations instead.
Wayleaves – Internet and phone services are essential for any business. Unfortunately, providers can take weeks or months to set up new internet cables and connections. Liaise with your landlord as early as possible as to whether you need to enter into a ‘wayleave’ with a provider in order to get internet and phone access at your new property.